Beltran is modeling its increase debt/buyback strategy on Civitas Inc., another firm in the same sector. Civitas was an all equity funded firm with 100 million shares outstanding trading at $ 10 a share, a cost of equity of 9% and expected growth rate forever of 3%. The firm borrowed $ 600 million and bought back shares at $10.50 apiece.

Assuming investors are rational, estimate the cost of capital for Civitas after the transaction.

Answer rating: 100% (QA)

If the investors are rational the cost of capital will remain unchanged The reaso... View the full answer